Disaster Looms Over New CMS Rule
Over the last decade, hospitals have increasingly expanded their services, moving beyond the physical perimeters of their building to outpatient medical facilities. Partly born out of a desire to offer a full range of integrated medical services to patients, it was also born out of a necessity to offset unreimbursed inpatient expenses incurred within the hospital setting. Unfortunately, a new cost cutting effort threatens to upset this system and to limit access to the care Americans need.
The Centers for Medicare and Medicaid (CMS) recently proposed an expansion of “site neutral payments,” a system that reimburses providers the same rate for a service, regardless of where it is carried out. While this appears to make sense at first glance, in reality it fails to account for the fact that hospitals bear higher costs than independent physicians and neglects to recognize the complexities of treating illnesses in an inpatient setting.
This issue started when CMS first instituted the diagnosis-related group (DRG) system of reimbursement diagnosis-related group (DRG) system of reimbursement. DRG pays hospitals a fixed amount based on a Medicare patient’s diagnosis. If the hospital spends less on the patient’s care than the DRG amount, it makes a profit from the stay. If the hospital must spend more, it loses money.
An example of how the DRG reimbursement system works can be seen in a common scenario that occurs in hospitals every day. Mr. Smith and Ms. Jones enter the hospital with the same diagnosis. Based on the diagnosis, Medicare will pay the hospital a set amount for treating the patient for a predetermined number of days. Mr. Smith’s treatment goes well, and he has no complications and is discharged from the hospital in fewer days than the DRG allows. Ms. Jones, however, has a more difficult time and has a reaction to the drug that is administered to her for treatment. The complication necessitates a protracted hospital stay and the administration of additional drugs that often cost tens of thousands of dollars and, occasionally, hundreds of thousands of dollars.
The additional drugs and extended stay are not billable to Medicare. With a DRG, Medicare pays the hospital a set amount based on the diagnosis the patient received requiring the hospitalization and not based on how much had to be done to treat the patient, how long the patient was hospitalized, or how much had to be spent to care for the patient.
To offset the losses that hospitals incur for inpatient care, Medicare began a payment system for treatment based on location. This allocated larger reimbursements for care provided in hospital owned outpatient facilities and smaller reimbursements to free standing facilities owned by physicians or other entities. The lower payments to non-hospital facilities were based on the recognition by CMS that these facilities do not shoulder the unpredictable and significant costs associated with inpatient medical services.
Hospital owned outpatient medical facilities have increased dramatically since the implementation of the DRG system of reimbursement. The growth of such facilities did not go unnoticed by the federal government and as a result Congress passed the Bipartisan Budget Act of 2015 which enacted site neutral payments. This ended the practice of paying outpatient facilities owned by hospitals a higher rate.
CMS has since embraced site neutral payments as a cost saving measure. But the significant reduction in reimbursement rates to hospital owned outpatient facilities has alarmed the health care industry. Concerns abound about the financial stability of hospitals that continue to receive a DRG rate for inpatient care.
To partially address these concerns Congress and CMS have provided limited exemptions from site neutral payments for certain facilities provided they do not relocate, renovate, rebuild or expand. As a result, this stopgap fix will regrettably penalize facilities that make future upgrades or provide additional services to their patients by revoking this carve out.
At present, Medicare pays different rates for hospital outpatient facilities, free standing ambulatory surgery centers and physician offices based on a variety of factors and weighted values that go beyond the actual cost of providing the service. Unfortunately, neither CMS nor Congress considered the actual cost of care for patients when developing the site neutral reimbursement system but instead defaulted to the position of merely paying all provider types whatever the lowest reimbursement amount is for any service.
Before CMS implements a site neutral payment system, the health care delivery system in its totality must be considered. Hospitals must be appropriately reimbursed for the cost of providing inpatient hospital services, especially if outpatient facility payments will no longer be available to subsidize the cost of inpatient care. Policymakers in Washington should be similarly cognizant of the fact that upsetting this balance could cause a domino effect, as commercial payors usually follow the lead established by Medicare. Disaster looms if we ignore the ways our healthcare payment system has historically been woven together to continue to provide services in both an inpatient and outpatient setting, and corrections must be made now.
Vickie Yates Brown Glisson is the former Kentucky Secretary of the Cabinet for Health and Family Services and a nationally recognized health lawyer.
